Czechs miss out as Central Europe drives towards robust recovery

By bne IntelliNewsNovember 15, 2013

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Economic growth data surprised with its strength across most of Central Europe in the third quarter. Poland and Hungary were particularly impressive, suggesting their recoveries are more robust than suspected, though with the Eurozone struggling for traction, the Czech Republic - one of the most closely linked to the single-currency area - slumped.

Although Latvia was towards the top of the EU pack yet again with third-quarter growth at 3.9% year on year (it was just edged out by Romania at 4.1%), regional heavyweight Poland was star of the show with growth that picked up to 1.9%. That was more than twice the expansion the country saw in the second quarter, and beat analyst forecasts of 1.6%. In quarterly terms, Poland's GDP grew 0.6%.

The result will be a relief for the Polish government, whose approval ratings have come under heavy pressure since the economy - so robust through many of the crises of the last few years - sank alarmingly towards stagnation starting last year. That saw Prime Minister Donald Tusk throw out much of his plan for fiscal austerity to provide funds for stimulus. The central bank has also been put into harness to cut rates and provide capital to lend.

The vital issue for Poland traditionally is its relatively large domestic demand, which frees it from the overwhelming dependence on exports to the EU that affects others in the region. However, analysts suggest both elements helped through late summer and early autumn.

"The [latest] figure indicates that the recovery is solid," write analysts at Erste Bank. "Although the structure will be presented at the end of the month, we believe that the growth was driven by net exports and the positive contribution of private consumption ... we expect that the economy will continue to grow in the coming quarters."

In relation to expectations, Hungary did even better, pushing to 1.7% year-on-year growth - almost double the 0.9% anticipated - thanks to the central bank cutting interest rates to record lows and pumping cash into the economy via lending programmes for small businesses. Analysts note that although exports are likely to have provided the most traction, domestic demand is also likely to have picked up thanks to government-enforced cuts to utility tariffs.

As Tim Ash at Standard Bank notes, the plan seems to be going perfectly for Prime Minister Viktor Orban, who faces elections in the spring. "Orban will no doubt argue that it is ample vindication of his somewhat unorthodox economic policies ... albeit a good harvest has also probably helped," the analyst adds, before pointing out that the longer-term picture for growth is muddied by a likely lack of investment due to government pressure on larger companies and banks. However, that of course won't become apparent until after the ruling Fidesz party faces the polls.

For the meantime, Economy Minister Mihaly Varga sought to press home the advantage. He suggested overall growth for 2013 could push to 1% - Budapest's original forecast was for 0.7% - and that the Magyar Nemzeti Bank's existing lending scheme could be expanded to offer cheap loans to people wanting to build their own homes, reports the Wall Street Journal.

The bullish mood was somewhat at odds with that in Eurozone capitals however, as the single-currency area revealed that annual growth slumped to a contraction of 0.4%. That said it at least managed to keep its head above water on a quarterly basis at 0.1%. While that was disappointing compared with 0.3% in April-June, and has set many off again questioning the strength and pace of recovery in Europe, the Eurozone had previously spent 18 months in recession.

Of particular concern to Central Europe will be the slowdown in Germany. The lynchpin for the region due to its large role in demand for manufacturing output to feed its own exports, growth slowed to 0.3% from 0.7% in the previous quarter. State statistics office Destatis cited weak exports as the key factor in the weak result. Little surprise then that Slovakia - the most export dependent of the Visegrad countries - struggled to growth of just 0.2% on quarter.

However, it was the Czech Republic that provided the biggest shock, reporting a drop of 0.5% on quarter, and 1.6% on an annual basis. On the one hand, the Czech government has differed from both its Polish and Hungarian peers in refusing to offer stimulus to the economy over the last three years, as the previous government stuck to strict austerity. That stance is still in place for the most part due to a political standoff.

On the other, analysts at Kommercni Bank suggest they expect the final result to differ significantly from these preliminary readings. Noting that industrial and retail data for the third quarter looked relatively robust, they write that they still think recovery from the country's longest ever recession got underway between July and September.

"Fortunately, monthly data from the real economy provides a different view and confirms recovery in the domestic economy," they say. "Czech GDP data often sees significant revisions by the Czech Statistical Office (and sometimes after a very long time), and thus preliminary estimates usually offer a very distorted information regarding the actual state of the economy."

At the same time, like neighbouring Slovakia, the economy has an overwhelming reliance on export demand in the Eurozone. Recovery in the single currency area over the last few months has been credited with pulling the Czechs out of the mire; stalling growth there would derail momentum in Prague.

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